A blog by Joel Barolsky of Barolsky Advisors

Posts Tagged ‘culture’

The legal world is about to enter a new era of standing up for principles

In Articles, Commentary on 11 June 2022 at 12:11 pm

The full text of my opinion piece first published in the Australian Financial Review on 9 June 2022. The article was #3 Most Viewed in the Companies Section on afr.com on day of publication.

The legal world is about to enter a new era.

Until the late 1990s, it was common for law firms to be identified by a strong affiliation to a particular religion, political party or ideology.

We had “Catholic firms”, “Labor firms” and “union-bashing firms”. These labels were reflected in the make-up of a firm’s partner group, the type of clients they served and the work they did.

Over the past two decades, many of these firms have tried to dial down these affiliations and present themselves as agnostic. This has meant changing the partnership cohort to include people from diverse backgrounds and taking on a wider range of clients and matters.

However, there are signs we are about to commence a new period where firms will be forced to take a position on a range of issues, especially in the ESG area.

They are already being asked by their staff and others where they stand, and will be judged by their willingness to uphold these principles.

To illustrate, a law firm that actively supports a shift to carbon zero may come under enormous pressure to “live” these principles and refuse briefs from fossil fuel clients. This might include not working for banks and financiers that provide capital to these same clients.

At the recent Australian Financial Review Banking Summit in Sydney, the CEOs of the Commonwealth Bank and NAB were greeted by protesters chanting about “bastard” banks funding coal and gas projects.

Christopher Black said in a letter to NAB chief executive Ross McEwan: “I am a 15-year-old climate disaster survivor. I’m in Year 9, and I live in Forestville, and I am very concerned about the climate crisis. For me, this is a very personal issue, which is literally a fight for my future.”

Law firms already have quite a few Chris Blacks working for them. If the recent election is anything to go by, they will become the majority over the next few years.

It should be noted that law firms and the profession have been grappling with ESG-related issues for some time.

Key presentative bodies like the Law Council of Australia have been strong advocates on a range of social issues, including refugee rights and access to justice. Almost all major law firms have comprehensive pro bono programs that focus on community work and addressing social ills.

Law firm leaders were active campaigners for same-sex legislative change in 2017 and will likely be so for the Indigenous Voice as it heads to the referendum promised by the Albanese government.

Hip-pocket consequences

What’s different about this new era is that the focus of change is not within the broader community or legislation passed in Canberra, but rather directly on how the firm itself operates.

In some instances, it could have serious hip-pocket consequences. Having to drop all its coal clients could be fatal for a resources-focused firm.

Another aspect of this new era is that firms may be forced to be more public on their specific policy on a particular issue. The pressure will come from external stakeholders such as clients, referrers and regulators, but more especially from staff. If the war for talent continues, employees will have more leverage and be a powerful catalyst for principles-led change.

The first step every firm should take is to identify ESG-related risks that may affect a firm’s social, and internal, licence to operate.

There will be a number of relatively simple and cheap things the firm can do to reduce some of these risks. For example, firms can work towards having a carbon zero, or carbon negative, footprint.

For other issues, firms should consider establishing new governance entities or roles that focus on ethics and principles-led decision-making.

Law firms need to be better prepared for these difficult ethical choices. The Chris Blacks in their ranks will be demanding it.

Will Danny Gilbert’s succession be a train wreck or triumph?

In Articles, Commentary on 1 April 2022 at 2:42 pm

The full text of my opinion piece first published in the Australian Financial Review on 31 March 2022. It was #2 most viewed article on afr.com’s Companies section on that day.

For law firms, a leader stepping down can be a moment of vulnerability. Most partners know succession done badly can have significant cultural and financial consequences.

So, it’s no wonder the announcement at Gilbert + Tobin that managing partner Danny Gilbert is stepping down is being closely watched across the legal industry.

I suspect the interest is less about the welfare of Gilbert and more about watching a potential train wreck in slow motion. Or, perhaps learning from a best-practice study in leadership transition.

Succession management in law firms is different to major public companies or government agencies.

It’s usually partners at large, not the board, who vote for their preferred leadership candidate. They can also fire them at any time.

The candidate pool for managing partner is usually much smaller, with a strong preference for those in the existing partnership.

‘Home-grown’

Only two of the top 30 firms in the latest Australian Financial Review Law Partnership Survey don’t have “home-grown” leaders. The country’s largest law firm, Minter Ellison, are again in that boat after having two external CEOs from the large consulting firms.

In larger firms, the candidates may have to give up practising law and take on a new career with poor employment prospects after their tenure ends.

In my view, law firms run into succession issues when there is a major power imbalance across the partnership.

Power in a firm is about:

  • Decision-making: who can make or significantly contribute to key decisions such as setting direction, allocating resources, recruiting new staff, resolving conflicts and setting reward and remuneration;
  • Information: who has access to what information and when they receive it; and
  • Relationships: who has sway with key clients and figures inside the firm.

It is usually concentrated in three areas: directed power from the office of the managing partner or executive leadership team; individual power held by specific partners and practice team leaders; and collective power which is held by the broader partnership operating as a whole.

Shared power

To work effectively over time, a firm needs to ensure a sense of shared power.

In other words, the partnership needs to be directed with an agreed strategy led from the top; individual partners need to feel empowered and have the autonomy to build their practices; and at the same time, the partnership feels part of one firm and involved collectively in making critical decisions.

Problems arise when there is a major power imbalance.

When a firm has too much directed power, it may succeed while the “dictator” is in control. However, their departure can result in a massive power vacuum characterised by infighting and wheel-spinning.

Firms with too much collective power become paralysed democracies. Endless meetings to resolve trivial issues mean less partner time on the things that really matter – clients and people. Most collectives also seem to do poorly in building a pipeline of future leaders.

Fly or fail

When partners have too much autonomy, sub-cultures or silos can emerge. If each partner is only looking after themselves, the firm merely becomes a shared office or a hotel for lawyers.

The construct of shared power can be a useful lens to analyse why some firms fly or fail.

From the outside looking in, Gilbert + Tobin appears to be addressing the potential succession risks with an extended process of selection and baton passing.

To avoid this issue repeating, Gilbert + Tobin would be well served by ensuring it has the right power and governance model rather than looking for Danny Gilbert mark II.

The managing partner’s decision to step down after 33 years is being closely watched across the legal industry.

Law firms have a big problem, and the answer is inside their offices

In Articles, Commentary on 15 March 2022 at 12:14 pm

The full text of my opinion piece first published in the Australian Financial Review on 10 March 2022. The article was the #1 most viewed piece in the Companies Section of afr.com on the day of publication.

Lou Gerstner, the former CEO of IBM, famously stated that “an organisation is nothing more than the collective capacity of its people to create value”.

“Culture isn’t just one aspect of the game,” he said. “It is the game.”

So, it is with law firms.

Despite many thriving during the pandemic, there is a deep concern that connections people have with the firm and with each other are getting weaker, not stronger.

As one managing partner put it to me recently, “I worry that the logo on our lawyers’ screens becomes the only real difference between working for us and for another firm.”

There are three main reasons underpinning these perceived threats to firm culture:

  • Remote working: The move to a hybrid operating model may result in people experiencing a working life that has fewer meaningful interactions with fewer people. With weaker emotional bonds, the ties that bind loosen. Most lovers know that long-distance relationships seldom work out.
  • Fatigue: Thomson Reuters Peer Monitor data suggests the past 18 months have been particularly busy. Many senior practitioners are exhausted from heavy workloads as well the stress of living through a major public health crisis. The energy required to rebuild culture and restore relationships is simply not there. Most people at the brink of burnout will seek to lean out rather than lean in.
  • New faces: The war for top legal talent in Australia is hot and will remain so for the foreseeable future. Some firms are now experiencing staff turnover rates of more than 25 per cent. With every departure there is a loss of institutional memory as well as personal loss and disconnection. With every replacement, there is a new set of standards and expectations to shape and fresh relationships to form. The cumulative impact of one in four new faces each year is potentially massive

No quick fix

Unfortunately, there is no quick and easy fix. 

Most firms are looking to enhance the work experience of each employee, with the strategies that include:

  • Ensuring every associate has at least one strong mentoring relationships with a senior practitioner;
  • Enhancing partners’ and supervising associates’ skills in giving and receiving feedback;
  • Having an effective workload monitoring system to ensure sustainable work patterns across the team; and
  • Organising one-on-one “stay interviews” that focus on career opportunities and reasons to stay.

All these efforts are commendable, but they can inadvertently exacerbate the cultural atrophy problem.

Sub-cultures

In building stronger vertical relationships within practice teams, there is an increased risk of distance and disconnection with other teams. This could lead to less of a one-firm mindset and the emergence of stronger sub-cultures.

Firms need to work both vertically and horizontally to preserve their culture. The latter means amplifying the role, status and skills of “lateral leaders” who work across the firm connecting people from different practices to address a specific opportunity.

These roles typically include client relationship partners, sector leaders, major matter leads, business service heads and strategic pursuit leads.

Lateral leaders

Effective lateral leadership is largely about facilitating deep cross-practice collaboration. From a culture perspective it enhances understanding, widens networks and creates a stronger identity with the firm and its strategy.

If firms are serious about reducing attrition and preserving culture, they need to create the capacity for partners to be more effective in their leadership roles. It takes time to be a mentor, to supervise and to influence without authority.

Otherwise, the only option is to increase the logo size on the screen and hope for the best.

Are law firms ready for the Great Transition?

In Articles, Commentary on 5 November 2021 at 4:51 pm

The full text of my opinion piece first published in the Australian Financial Review on 4 November 2021.

Is the Great Resignation mostly hype or an issue of substance?

The evidence suggests that the period ahead will be much less about Australian lawyers seeking alternative careers, and much more about them responding to new opportunities in a tight labour market.

In other words, there is more validity to the idea of the Great Transition rather than the Great Resignation.

The Great Resignation was first coined in the United States just after a record 4 million Americans resigned from their jobs in April.

The theory goes that the COVID-19 experience, including role changes, greater workplace flexibility and more working from home, has led to people rethinking their careers, work-life balance and even their long-term goals.

The question is whether Australia will follow the US as it emerges from lockdowns and border restrictions? The fear is that hordes of workers will walk out the door for greener pastures, whatever they may be.

When it comes to Australian lawyers, the greener pastures won’t be in the Byron Bay hinterland, but for some it will be in other law firms or other legal roles – both here and overseas.

While there’s been more movement between firms in recent months, there are no underlying factors to indicate above-normal migration out of the profession. If anything, the prospects for better incomes and working conditions within legal organisations have never been better.

Golden era

The demand for commercial legal services will continue to be strong for the foreseeable future. Assuming capital remains cheap and abundant, ESG pressures persist and there’s no war with China, this golden era will continue.

What’s special about this cycle is that most sectors and almost all practice areas are predicted to grow.

Within this context, the key career transitions over the next 12 to 18 months will be away from firms/teams that are poorly led, don’t match the market in terms of remuneration and benefits, simply revert to the pre-pandemic operating model, and give lip service to workplace wellbeing and connection.

The transitions will be towards firms that help build their CVs, offer more interesting work, provide better and clearer career opportunities and are known to be happier places to work. Some will also be attracted to the brighter lights of New York and London.

Euphoria

The Great Transition will probably last for a year or so before returning to a more regular cycle. The euphoria of surviving COVID-19 will boost confidence.

This energy – together with the publicity around firms offering 10 per cent pay rises, news of major vacancies and the social proof of others making successful moves – will create momentum of its own.

There may be some regrettable departures that are clearly beyond a firm’s control.

If a high-flying associate wants to leave for a $US250,000 ($330,000) role in a White Shoe firm in New York, there’s probably not a lot that can be done other than staying in touch and welcoming them back (with an offer of three months’ sleep).

Leadership

Going through the list of what is in a firm’s control, the quality of team leadership is probably the most important element to consider.

A strong team leader can provide a sense of direction and connection, monitor workload and wellbeing, progress careers and development, and facilitate a positive work environment.

To make it through the Great Transition, firms need to ensure every team leader is up to the task. Stroking the ego of a powerful senior partner by making them a team leader may not work anymore. Team leaders need to have the time, skills, support and resources to do their job properly.

Putting a different label on the Great Resignation may reduce the concerns about overall labour supply across the market. However, there will be no let-up in the pressure on individual firms to retain their top talent over the next 12 to 18 months.

The empire strikes back

In Articles, Commentary, Legal Technology on 8 October 2021 at 11:20 am

The full text of my opinion piece first published in the Australian Financial Review on 7 October 2021.

The biggest structural change in the Australian legal market over the past 30 years has been the growth of in-house legal teams.

But while the vast majority of current in-house solicitors received their initial training in private law firms and then moved across to the client side, I predict that the next decade will see a reversal of this trend, particularly at more senior levels.

In comparing the employee value proposition of in-house versus private practice, there are five areas where law firms are fighting back.

Flexibility

In a post-COVID-19 world, very few law firms will return to a work schedule of 9 to 5, five days a week, in the office. They will be far more accommodating of lawyers seeking to work from home for part of the week, or those wanting to work across different time slots in the day or to limit the number of workdays.

Any perceived advantage that in-house roles were more flexible has been eliminated by law firms learning to operate effectively in an anywhere anytime model.

Workload

For many years, the lure of in-house has been roles with more work-life balance, less stress, and no timesheets. 

While no timesheets are still a point of difference, most in-house lawyers are now reportedly working extremely long hours and are stretched thin. The pressure for them to do more with less is incessant, and the demands on their time are likely to grow rather than diminish. 

On the other side of the fence, many law firms are rejigging the workload of graduates and early career lawyers to be far more sustainable. They have also stepped up their programs focused on employee mental health and wellbeing.

Technology

Association of Corporate Counsel research suggests General Counsel are constrained in adopting technology by restrictions on capital expenditure and a lack of time to implement new systems.

Many law firms, in contrast, are ramping up their technology investment and experimentation. The recent Thomson Reuters State of the Legal Market found that law firms spent over $22,000 per lawyer on legal technology in FY21. The same paper revealed that 30 out of the 50 largest law firms in Australia now have an innovation function.

Over time, the technology gap between in-house and private will grow. A career move in-house may become to be seen as a step back in time – a move to a job using old and blunt tools of the trade.

Income

Data from legal recruiters Mahlab suggests in-house teams pay more for 3 to 7-year PQE lawyers, but after that, the differential starts to swing the other way. Equity partners in premium law firms are now earning incomes that far exceed their peers in in-house roles, save for a few GCs of major listed companies that enjoy exceptional incentive arrangements.

Private practice salaries and benefits are estimated to increase by 8 to 10% in the coming years. It will be very hard for in-house to price match given budget constraints and the need for consistency across organisation-wide pay scales. To the chagrin of many CFOs, in-house lawyers are already the most expensive people on their payroll outside the C-suite.

Culture

“It’s a boys’ club”, has been a common refrain of female lawyers leaving private practice. With an industry average of just under one-third of female law firm partners, their complaint may have had just cause, till now.

Most of the top 30 law firms across Australia have fully committed to a 40:40:20 or an equivalent diversity goal at partner level. Significant efforts are being made to address unconscious bias and to eliminate sexist language and behaviour. More senior leadership roles are filled by women. Comprehensive diversity and inclusion programs are now the norm.

The progress is slow, but the prevailing culture across many law firms is shifting on gender issues.

If trends in the five areas described above persist, the employee value proposition of in-house will become less compelling. With increasing demand, in-house teams will have to build their own capacity by hiring more graduates and invest in early-career legal and commercial training.

This is good news for law firms; after years of training young talent only to lose them to in-house roles, the shoe will comfortably fit on the other foot.

Is your practice in the right shape?

In Uncategorized on 14 August 2021 at 12:10 pm

The full text of my opinion piece first published in the Australian Financial Review on 12 August 2021.

The start of a new financial year often coincides with law firm partners updating their budget and doing a strategy health check.

Targets are usually set around revenue, margins and headcount, as well as qualitative indicators such as client service and staff engagement.

This is great, but there is one critical thing missing.

Practice shape is one of the most important drivers of success but seldom gets a mention. By shape, I mean the number, type and roles of practitioners at different levels within a practice team.

David Maister, in his seminal work, Managing the Professional Services Firm, stated, “many factors play a role in bringing goals [of client service, staff satisfaction and financial success] into harmony, but one has a pre-eminent position: the ratio of junior, middle-level, and senior staff.”

Getting it wrong

Poor practice design can be a handbrake on practice performance.

Being too ‘top heavy’ can result in mid-level lawyers leaving to join other firms with better promotion prospects. It could also lead to deep discounting so as to match competitors with more appropriate leverage.

A ‘bottom-heavy’ practice runs the risk of producing lower quality work and creating burnout and stress for those left to carry the load. (Bottom-heavy is also a good description of me after 18 months of intermittent Covid-19 lockdowns 😀).

A ‘missing middle’ often leads to practice stagnation and major financial opportunity costs. Interestingly, many premium firms are facing this issue right now partly as a result of reduced graduate intake in the mid-2010s.

Bad design can also contribute to systemic under-delegation. Partners who hog all the work make their practice far less competitive over time, not to mention sapping the morale of their people.

Succession is also a whole lot easier when the next generation is there trained, ready and waiting.

AFR August 2021

New shapes

The world has changed since David Maister first published his book in 1993. New technologies, providers, channels and delivery platforms have created new design opportunities beyond the traditional pyramid.

With the rocket model, the left and right corners of the pyramid are cut out and most low-level process work is done using a combination of legal technology, paralegals and law @ scale outsource providers. Rocket practice teams generally have fewer entry-level lawyer positions and more legal operations roles.

The hub and spoke model has a partner at the centre of a network that brings in a range of different resources and modular solutions to solve a specific client problem. These resources may include full-time lawyers in their firm as well as advisors from other professional service firms, the bar, data analysts, client resources and third-party software platforms.

The agency shape splits a practice into specialist groups focused on what they’re best at. A great example of this is the award-winning ad agency, Thinkerbell.

Thinkerbell has two groups: Thinkers and Tinkers. To quote their website, Thinkers are “a cross between strategy-types and suity-types, they ask a lot of questions and listen very carefully for the answers. They’re problem-solvers.”

It says Tinkers are “creativey-types and producery-types who pull things apart and put them back together again. They hit things with hammers and fiddle with knobs and buttons. They experiment, and play and build.”

Revisit your design

So, returning to annual budgets and strategic plans, practice leaders need to ask themselves a few critical questions about their current practice shape:

  • does it help or hinder career advancement and learning opportunities?
  • does it fit with the mix and complexity of the work?
  • does it optimise the business model i.e. how the team makes money?
  • what should the shape look like in three years, and in seven years?
  • what alternatives could be considered?

The agency model might not be a realistic alternative at this time, but it’s essential that leaders keep thinking and tinking when it comes to practice shape.

Where was Minters’ chairman during the Kimmitt crisis?

In Articles, Commentary on 26 March 2021 at 7:28 pm

The full text of my opinion piece first published in the Australian Financial Review on 26 March 2021

“The Minter’s chairman went missing in action. One of the most important jobs of a chair is to resolve major disputes within the partnership without it spilling out to the rest of the firm, and even worse, into client land.”

This quote reflects a sentiment expressed by many law firm leaders I spoke to about the recent saga at MinterEllison.

While I’m not privy to the internal machinations at Minters to say whether this is a fair judgement or not about the firm’s chairman, David O’Brien, it does raise the question as to what should be expected of a chair?

 In my view, the answer lies in the confluence of governance, guidance, and glue.

Governance

The chair of partners usually has an active leadership role in firm governance. As such, his or her job is to ensure that management’s direction is broadly aligned with the interests of equity partners and other stakeholders.

Unlike company structures, partnership governance roles and responsibilities are not stipulated in any statute and are largely ambiguous. All partners are assumed take on all responsibilities concurrently. In this context, the chair and managing partner are expected to carve out a tailored governance framework that balances stewardship, operational efficiency, risk-taking, control, transparency, partner autonomy and accountability.

The chair of partners would usually be expected to facilitate the effective functioning of board and partner meetings, ensure accurate timely and relevant information flow, oversee risk and compliance, manage board composition, and lead the process of reviewing the managing partner’s performance and succession.

In some firms, the chair is actively involved in deciding profit allocation and progression. In other firms, their role is more of an independent arbiter in profit allocation appeals. 

Guidance

While most medium and large firms have adopted a more ‘corporate’ governance model, partners as owner-operators still often want a say when it comes to critical decisions around firm purpose, values, capital allocation and broad strategic direction.

The chair plays a critical role in helping the firm’s executives navigate this decision-making minefield.

Their guidance is critical in deciding which fights to pick, what options are on or off the table, what’s the best approach and forum to raise issues, and where power really lies in and around the partnership.

Chairs often act as cultural barometers – forecasting the mood, energy, and tone of the partnership. Their predictions of an imminent storm, or conversely, a period of calm and confidence can be hugely beneficial.

At a more micro level, firm chairs often act as a sounding board or mentor for the managing partner. In this role, they help talk through tricky issues, provide honest feedback, and offer comfort when exasperation overwhelms.

This mentoring role is particularly important for the induction of new managing partners or an external appointment. In the latter case, the chair needs to lend some of their social capital until the new leader’s position is firmly established. 

Glue

The third role of the chair is to foster partnership cohesion and stability. This doesn’t mean leading the firm cheer squad, but rather putting out spot fires and addressing corrosive politicking.

Spot fires may include a major fallout between two senior partners or where an individual partner has displayed behaviour incongruent with the firm’s values or there is a case of systemic underperformance.

It is quite common for the chair to join the managing partner in having a fireside chat with these problem partners. The chair helps create a sense of deep collective concern. This threat is hoped to be the catalyst necessary to change aberrant behaviour.

Pie-splitting is often a source of ‘corrosive politicking’. For example, in meritocracies choosing a side when there’s a commercial or legal conflict could result in a major differential in individual earnings. In these instances, the chair may get involved in dialling-down the emotions and ensuring that trust in the model is maintained.

Coming back to the MinterEllison situation, I don’t have any first-hand information as to assess whether the firm’s chair did an effective job in governing, guiding, and gluing? As with so many tricky issues in law firm partnerships, that’s ultimately for Mr O’Brien’s partners to decide.

Is HWL Ebsworth Limited a buy?

In Articles, Commentary on 30 August 2020 at 12:35 pm

Full text of my opinion piece first published in the Australian Financial Review on 27 August 2020.

Earlier this week, the Australian Financial Review reported that HWL Ebsworth (HWLE) was preparing to list the firm on the ASX with a $1 Billion-plus valuation.

While details are scant at this stage, it is worth asking whether stockbrokers will recommend a BUY when the HWLE Limited prospectus is issued?

My prediction is they will give this IPO a thumbs down for five main reasons.

#1 Insufficient surplus

As a listed entity, HWLE partners will have to share a portion of the firm’s profits with external shareholders. For the sake of argument assume the current partners enjoy average earnings of $1.5 million per annum. In the future, partner earnings – salary plus bonus minus profit share – might reduce to say $1 million. The incumbent partners will most likely accept a reduced annual income given their significant capital gain upon listing.

This business case seems logical but misses one key point – there is a fiercely competitive market for top talent. Many of the best HWLE partners are proven rainmakers will still be able to command incomes around $1.5 million or more at other non-listed law firms or by setting up their own practice when their employment and escrow handcuffs come off.

At $1 million – the maximum the firm can pay and still maintain dividend payments – HWLE Limited will be way off the mark in attracting any new ‘$1.5 million’ partners.

Over the long term, there’s insufficient surplus to keep both partners and external shareholders happy.

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#2 Clients don’t buy the firm

When Shine Justice Limited first listed on the ASX, they presented strong evidence that their personal injury clients chose them because they trusted the firm’s brand and were largely lawyer agnostic.  When IPH listed, investors were enticed by a large proportion of annuity income from patent and TM renewals and an ambitious plan to scale.

When it comes to HWLE’s mostly business-to-business relationships, research shows that clients are much more discerning around who does their work.

HWLE external shareholders will not be buying a company with a strong brand with sticky institutional client relationships. They will be buying a collection of individual portable practices, each with their own reputation and client following.

#3 Vague growth story

External shareholders examining the IPO prospectus will be looking for a compelling growth story. They will want to see how a fresh capital injection will drive shareholder value.

Under Juan Martinez’s leadership, HWLE has a solid track record of acquiring legal practices without the need to splash much cash. Economies of scale work well in mining but less so in premium legal where even boutique firms can generate supernormal profits. Despite all the hype, there’s no legal technology yet available that will create a sustainable cost or client service advantage. Creating a multi-disciplinary practice or moving offshore is fraught with risk.

So, unless I’m missing something, the growth plan beyond more of the same seems less than convincing.

#4 Key person risk

From interviews with former staff, it appears that Juan Martinez has a robust directed leadership style. Overheads are kept to a minimum and all lawyers are encouraged to be on the tools all the time to compensate for below-market pricing.

This is the operating model that has been the bedrock of HWLE’s success to date.

Given Mr Martinez’s tenure and track record, the market will have many questions over the strength of HWLE’s bench. If the proverbial bus had to arrive who will keep the firm together and herd the cats? I’d imagine the firm’s value will be discounted heavily because of this key person risk.

#5 More losses than wins

Future investors in HWLE will have a good look at the investment category and proceed with caution. A 20-year analysis of law and accounting firm IPOs in Australia reveals far more losses than wins, especially for external investors. This includes firms like Stockfords, Harts and Slater & Gordon.

One of the reasons for these failures is the loss of the partnership culture that underpins their initial success. This culture comes from the incumbent partners’ sense of proprietorship, stewardship, collegiality and identity. Shifting from partner to employee is a big shock to many. Financial transparency, share price volatility and an added compliance burden all often have a negative cultural impact.

In conclusion

I have drawn strong conclusions about the potential float of HWLE without access to any specific details. I look forward to reviewing their IPO prospectus and seeing how wrong I am. But if I’m not, buyer beware!

How your law firm can limit virus hit to bottom line

In Articles, Commentary on 7 August 2020 at 3:42 pm

The full text of my 7 August 2020 opinion piece first published in the Australian Financial Review.

There is every chance that COVID-19 will mean a big hit to your firm’s revenue for the 2020-21 financial year. So, what levers are you using to limit the downside impact on profitability?

Greg Keith, the chief executive of accounting firm Grant Thornton, recently indicated he was anticipating a decline of 8.5 per cent in revenue and 33 per cent in profit.

It means that for every 1 per cent drop in income, they are forecasting a fall of nearly 4 per cent in profits.

Accounting firms, like law firms, are mostly high fixed-cost businesses that are super-sensitive to changes in revenue – both on the downside and the upside.

To limit the profit impact, firms tend to first cut non-essential spending like travel and entertainment. After these “easy” savings are exhausted, reducing staff numbers comes into the frame.

While there are obvious short-term benefits – staffing can comprise 60 per cent of all expenses – there’s a significant risk of not having enough of the right resources on hand when demand picks up. So, the 2020-21 saving needs to be weighed up against the full cost of re-hiring and training in the future.

In my view, there are two areas where firms could do a lot better to enhance profitability without letting people go – pricing and the sharing of resources.

Pricing for profit

Over the last few years, most mid-sized and large firms have worked on their pricing practices.

With a significant market downturn and price war on the cards, one firm recently redoubled its support for partners to preserve and capture value through price. This included video training modules on value articulation, gamified programs around price negotiation, improved analytics, new pricing tools [like Price High or Low 😀] and more direct hand-holding for new business pitches.

Some firms are adopting a range of creative strategies to meet client needs rather than merely dropping price. They include:

  • Adjusting payment terms and conditions so strapped clients are more willing to brief the firm rather than others;
  • Offering non-time-based pricing structures such as subscriptions, contingency fees or amortising fees;
  • Special promotions in ‘ring-fenced’ service areas to avoid across-the-board rate cuts and safeguard the firm’s brand position; and
  • Offering options at different price points.

One law firm offers its clients three pricing options on every new matter. They’ve adapted Qantas’ pricing approach by offering the equivalent of the airline’s Red e-Deal, Flex and Business Class options.  As with Qantas, each option has the same core benefits around quality and reliability but differ in terms of the format of the deliverables, roles, timing and scope.

Another firm analysed their top 100 clients to determine how each was being affected so they could tailor messages and offers. In one instance, this led to a new digital service offering as some clients moved to virtual selling and distributed operations. In another case, they shifted to a self-service model for a client going through a major cost-cutting exercise.

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Resource sharing

I was recently advising a law firm where analysis of time records revealed that some individuals and teams were extremely busy while others were well below capacity.

When I asked why resources were not shared to even out workloads, the most common response was that lawyers could not easily work outside their area of specialisation.

Not satisfied with that objection, I delved a bit deeper. My enquiries revealed a range of constraints – cultural, structural and personality – to collaboration. For some partners, “letting my people go” was a sign of failure. For others, they didn’t see any direct financial incentive to share resources, so they didn’t bother. In one office, each practice team saw itself as a self-contained business, and the prevailing mindset was more competitive rather than co-operative.

In good times, there’s often enough fat in the system to ignore these problems, But if your firm is looking at an equation that means every 1 per cent drop in revenue leads to a 4 per cent drop in profits, then you might need to change your thinking.

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